Building efficiency sector: ‘The 2030 debate was a set-up’

The EU’s climate establishment rigged the debate on 2030 targets with stacked projections for energy efficiency savings discounts, and wildly optimistic assumptions about the carbon market, according to buildings efficiency industry and NGO sources.

EURACTIV understands that officials from the European Commission's energy directorate are attempting to upend some of the most contested efficiency assumptions in the 2030 models, but are facing fierce resistance from the climate directorate, which is heavily invested in a sole 40% greenhouse gas target.

“There is an internal struggle to get the truth and an attempt to adjust the models but DG Clima (the climate directorate) doesn’t want to destroy the false premises on which the greenhouse gas-only target is based,” one source with knowledge of the 2030 dossier told EURACTIV.

At issue is the EU’s modelling for cost-effective carbon reductions by 2030, which was framed by "discount rates". These are annualised simulations of market failures, barriers and costs that can be applied to various pathways, some of which were included in an impact assessment accompanying the EUs proposal for a sole greenhouse gas target in 2030.

Higher discount rates carry higher risks for investors (albeit with higher potential returns) and, in line with the 2050 Roadmap, buildings efficiency was given a 17.5% discount rate, compared to 12% for industry measures, 8% for public transport, 9% for power generation, and 12% for tertiary sectors.

This was because of an assumption that consumers would not be helped to make efficiency improvements by Energy Company Obligations (ECOs) or other government programmes.

EURACTIV understands that experts from the Commission’s energy directorate provided information to their superiors showing that if such measures had been factored in, the discount rate would have been lowered to between 9% and 10%, in line with Buildings Performance Institute Europe (BPIE) figures. This would have made energy efficiency a highly cost-effective option.

Set-up

“This assessment was a set-up to guarantee that energy efficiency would not get a fair hearing in the current debate about a balanced and coherent policy framework for 2030,” one senior industry source told EURACTIV. “It beggars belief that policy-makers could have allowed themselves to be misled in this way.”

Oliver Rapf, the BPIE's director, said that the Commission’s choice of discount rate was hard to fathom. “An unrealistically high discount rate can make any investment look unreasonable,” he told EURACTIV.

“The risk associated with buildings efficiency is rather low compared to any other energy investment, therefore the discount rate should be lower as well,” he added. “This choice of discount rates does not seem to reflect reality at all.”

EURACTIV has seen ‘technical input’ to Brussels from one EU state on the 2030 modelling, noting a “mismatch” between current discount figures and previous Commission advice to use social discount rates of between 3.5%-5.5% for assessing energy efficiency in public investment projects.

High energy efficiency scenarios

“Using the high discount rates in a policy scenario does not inform policy makers on what a least cost energy system may look like if the right instruments are put in place,” it says. The input paper called for new models that included references to social discount rates or ‘high energy efficiency’ scenarios. These are now underway.

Observers and commentators alike were surprised when the EU executive recommended a sole binding 40% greenhouse gas cut for 2030, even though its own impact assessment found that a mild climate package including energy efficiency and a 30% renewable energy target would create 327,000 more jobs than a sole 40% emissions cut alone.

This would be “mainly due to high investments in energy efficiency,” said the document which was intended to inform policy-making decisions.

The International Energy Agency has described energy efficiency as the world’s first fuel – the one that is not used – and, along with renewable energies, a consensus holds that it provides cost-effective and easily verified greenhouse gas reductions.

Emissions Trading System: Devils in the detail

However, the Commission instead chose to propose using its Emissions Trading System (ETS) to indirectly lower emissions in the most ‘technologically-neutral’ way by incentivising nominally low carbon investments, whether in nuclear energy, shale gas or carbon capture and storage technologies.

The current carbon price of around €7 a tonne is too low to do this – or discourage coal use – and the strategy was appealing to several EU states because it did not require any significant governmental expenditure in the short term.

But, according to a little-read table in the EU’s 2030 impact assessment, the main driver for a 40% CO2 emissions cut will be a €40 a tonne carbon price by 2030, which will rise to €264 a tonne by 2050. It is unclear how these prices will be achieved.

The Commission’s working assumption is that the carbon price will influence decisions taken across all sectors of the economy – including those that the ETS does not cover, such as transport, farming and households – and that businesses will largely pay the long-term price for decarbonisation.

In practice though, the same industries and governments that supported an ETS-driven policy before 2030 would likely abandon it in short measure, according to Brook Riley, a spokesman for Friends of the Earth Europe.

“This is a kind of con trick,” he told EURACTIV. “They pretend to support an ETS-driven target for 2030 knowing full well that they will get loopholes in it for ‘carbon leakage’ which dilute it to little more than business as usual.”

In his speech announcing the 2030 package, the EU's president José Manuel Barroso, said that the final compromise would offer exemptions for industry considered vulnerable to carbon leakage, or the threat of relocation abroad by energy intensive firms.

Background

The EU’s 2030 climate and energy framework package was presented on 22 January 2014 as a successor to the three 20-20-20 targets of 20% greenhouse gas cuts, improvements in energy efficiency and renewable energy market penetration, all by 2020. The energy efficiency goal is non-binding and remains the only one the bloc is not on track to meet.

For 2030, the EU framework has proposed:

A 40% greenhouse gas reduction target that is binding at nation state level and may not be met by carbon offsets

The use of carbon offsets to meet further emissions reduction commitments made in international climate talks

A 27% renewable energy target that is binding at an aggregate European level but voluntary for individual member states

No consideration of any new energy efficiency target until after a June 2014 review of the Energy Efficiency Directive

Non-binding shale gas recommendations which could be made binding after a review in 2015

A market reserve facility for the Emissions Trading System, with the power to withhold or release up to 100 million allowances

An end to the Fuel Quality Directive, which mandates reductions in the greenhouse gas intensity of transport fuels, by 2020

The package was widely received as a compromise reflecting the balance of power between various member states at the European Council. It will now be discussed by MEPs at the European Parliament and EU heads of state at the European Council before a final version is agreed.

Timeline

20 March 2014: EU Council will discuss climate and energy issues

May 2014: New EU Parliament to be elected

May 2014: EU member states must prepare schemes for their energy companies to deliver annual energy savings of 1.5% as part of the Energy Efficiency Directive

Advertisement

Comments

So all these other countries cf. below are implementing an ETS, and Europe – the mother of the CO2e ETS will stop with it in 2030? And Friend of The Earth call that realistic/serious/plausible/whatever?

Countries with an ETS = Switzerland, China, Kazakhstan, Japan, California, Quebec, New Zealand, Australia and then there’s a bunch of countries with voted and planned ETS.

Besides … this Global Climate Destabilization is it going to go away by 2030 or will it have increased and made some decision makers/deniers change opinion? Climate Deniers will have continued making completely wrong decisions. Maybe all climate deniers will have perished by then? That would be one problem that solved itself :)) How realistic is that? :))

@Sven: The main point to keep in mind is that ETS-only advocates in the Commission are manipulating data to make efficiency look unacceptably expensive. This discredits the Commission’s most ambitious scenario – the one with 45% GHG cuts, efficiency and 35% renewables.

At this point we should be asking why on earth the ETS advocates – they’re from DG Climate Action and DG Sec Gen – are arguing against higher climate ambition… It’s bizarre, scandalous, etc. The best explanation I have is they have got it into their heads that they’ll never get the EU to agree on more than 40% GHG cuts. Therefore they want their baby – the ETS – to be the main policy instrument.

On the one hand it could be the cost of a loan to implement energy savings measures. On the other hand it could be the benefits (rate of return) expected by somebody/something from implementing energy savings measures.

With respect to people, various studies have shown that at least with respect to PV most people are happy (very happy) with an 8% rate of return and indeed, this is the kind of return you would expect from household PV. By extension, they are likely to be happy with a similar rate of return for energy efficiency measures. Whilst this is an assumption – it is a well grounded one. This raises the question: which dolt (& why) in the EC selected 17.5% (I liked the 0.5% presumably added to give that nice glaze of realism – that is, oh so important, when engaging in some cuisine with the books).

Risk is usually associated with uncertainty. Provided a proper survey of a house is undertaken then uncertainty (will the benefits really match the calculations?) will be minimised if not eliminated. Experience, knowledge & skill also minimise “risk”. At a household level EE is not difficult – the difficult bit is getting the energy incontinent public to do something/anything – which is why we have schemes to encourage/bribe them. The high “discount rate” for EE thus looks like a “oh this will never work – it’s all too hard” put a discount rate on it that proves it is too hard and let’s focus on EU ETS”.

This demonstrates clearly how inappropriate it is to seek to address the threat of climate change by creating a special directorate charged exclusively with this issue. Given its importance , it would sensible to return to the pre2009 position in which every Directorate within the European Commission is charged with forming policy positions taking due regard to their impact upon our climate,

The services of the Commission would like to react on the article publicised on 13/3/14 titled ‘the Building efficiency sector: ‘The 2030 debate was a set-up’.

The Impact Assessment accompanying the 2030 package was jointly made by both DG’s CLIMA end ENER, and was endorsed by the Impact Assessment Board. The applied modelling tools represent in a realistic manner costs associated with investments.

When assessing costs related to investments, different discount rates are being used in different sectors. These represent the cost of capital for the financing of investments for that sector. A household paying for a refurbishment of its house, a power company investing in a new power plant or a public planner investing in public transport expect different payback times and face different problems, costs and risks related to raising capital. For example, the observed required payback times are on average shortest for a household.

The article suggests that the modelling tools used and the cost estimates generated were on purpose designed to result in high costs related to building sector energy efficiency investments. This is incorrect. The modelling tools used where not altered in any way to change cost patterns or to prefer reductions in certain sectors or technologies. The modelling tools used and the methodology applied where the same as used consistently in previous exercises analysing climate and energy policy.

Mr Valero (spokesman for DG Climate Action),
In common with many people in the EC when criticism occurs you fail to engage with the substance of the criticism and instead engage in “a plastering exercise” – i.e. cracks are covered and you hope the problem will go away. If you wonder why many people are unhappy with the EC – well this is one example.

You mention “The applied modelling tools”. Page 8 of the IA mentions several tools whilst page 50 shows the core role played by PRIMES. You assert that said tools “represent in a realistic manner costs associated with investments”. That assertion has been challenged, substantively. Your only response is to continue to insist that the tools have produced realistic costs.

“Over the past 12 years, the European Commission has allowed the E3M Lab to feed Member States and the general public with misleading information about the future of European energy. It is clear that the PRIMES scenarios are consistently marginalising renewable energy sources, while overestimating fossil fuels and nuclear energy.”

If you feel that this is unfair criticism – well respond substantively – not with blatherings.

In Dec 2012, Eco Experts published a survey showing that in the UK the public was unaware that PV could give a return of around 7 to 10%. Most expressed delight at such a return. PV is part of a building’s fabric and thus the 7 to 10% is a good indicator of what people would be happy with in respect of energy efficiency measures. This is empirical. Perhaps PRIMES (and its paymasters the EC) prefer theory? Would you like to enlighten us Mr Valero? On what, exactly, is the 17% discount rate for the buildings based? Why would you have such a high discount rate? Why?

The IA is fundamentally biased from start to finish. The first 20 odd pages are a framing exercise designed to reduce the important of RES and EE. This is reflected in various sentences scattered like small crottes throughout the text, for example:

page 16: “Most renewable energy sources are not yet fully cost-competitive compared to other energy sources” PV systems can be built in the Med Basin at a cost of less than 6eurcents/kWhr (roughly similar to that from CCGTs). Or taking an example from across the Atlantic a US utility (same lattitude as med-basin) via a PPA is buying PV supplied energy at less than 5UScents/kWhr. (I can give you the sources)

Page 17 mentions RES costs/subsidies but fails to mention fossil costs and subsides. I have the redacted copy of DG Energy’s COM of Dec 2013 – we can see that direct costs for fossils are E25bn and indirect costs (source: OECD) are E40bn. An Italian judge last week judge shut down an Italian coal station exactly because of those “indirect” costs. The IA is all about “framing” and the framing is RES/EE costly.

Page 20 talks about energy costs for industry (due to RES?) – but at the same time does not mention that for much/most of industry energy costs as a percentage of total costs are in the 1 to 2% range (see the ECFIN report on this subject). However, such “nuance” and detail would affect the negative picture of RES and EE that the IA wants to put forward.

Next time you respond, I suggest you take off your plasterers overall and do so substantively – otherwise the credibility of the EC will continue to erode

@Isaac Valero: you say that “the methodology applied was the same as used in previous exercises analysing climate and energy policy”. Yes, that’s precisely the problem! The Commission has been applying unjustifiably high discount rates for efficiency for years, despite repeated warnings that they are erroneous.

But what’s really scandalous is that when people in the Commission proposed lower discount rates for efficiency, others – ETS hardliners, many of whom are from DG Clima – refused to apply them. And because efficiency is a crucial part of more ambitious scenarios, this means these ETS-only advocates are standing in the way of tougher action on climate change. Do you really want to defend their position?

Mr Valero – a letter from some of the largest companies in Europe e.g. Philips, GE etc has gone to the Council. The companies don’t think that the member states are taking Energy Efficiency sufficiently seriously. Given the way the EC has “fixed the numbers” I’m hardly surprised that they have decided to write.

Whilst you and your mates can bat off criticisms from me – I’m going to sit back and see how your plastering abilities square up to a very unhappy Euro industry.